Tuesday, March 19, 2013

Pearson CFO Robin Freestone at Deutsche Bank Media Conference

Robin Freestone was interviewed in front of analysts at the Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference earlier this month.

Full transcript from Seekingalpha

Some summary notes:

There are two mega trends impacting global education and they are very different:
  • Developed World:
    • Governments under pressure
    • No more money to spend on education
    • Student results not reflecting the amounts already spent on education
    • Fear losing education preeminence to developing nations
    • Belief need to improve 'productivity'
  • Developing World
    • Less state based - more private education: Brazil/India 15% privately educated students
    • Growing middle class will spend on education
    • Every year 100mm people join middle class and spending increases $1trillon
"Now if you look at what we're doing in developed markets, therefore, it's about efficacy. It's about trying to improve the outcomes with less money. And in the developing markets, it's about direct-to-consumer, where we're selling educational resources and actually education itself through our own colleges or through other people's colleges to that global middle-class"
  • Still selling them and will be for a long time to come but not growth market
  • Bundles and opening schools
"And so our cost base still reflects the old organization, if you like, to an extent, and we've got too many people, I'm afraid, who are designing beautiful books, ready to put them into the market and too few people designing software and running schools"
What's happening in the US market?
  • Always counter-cyclical: enrollments into college go down when the economy gets better.  More students go into jobs.  Enrollments contracted 2% last year and will do so in 2013
  • Less and less will we be selling books:  Selling better results: 
"In other words, rather than selling a product, a book, and saying "good luck with it, we think it's a wonderful book," but actually we really don't know whether it's really better than anybody else's book. What we're now going to be saying is, "we want you to get better examination grades. We've got a range of stuff here, mostly software, that will help you do that. And we're here with you to try and get your examination grades up, and if you implement it in this way, we can show you other customers who got that effect," and that's exactly what we're now trying offer into the market"
On the changing economics of their business:
  • Software at gross margin is a very nice business:  After break-even there is a "sizable margin improvement" and cash positions are far better.

"Anything involving books, frankly, from a working capital perspective is truly horrible. And when I first joined the company in 2004, we had a working capital to sales ratio of over 30%. And last year, excluding Penguin, it was 11%. And I think we are now seeing our way through a situation in a few years time when the working capital to sales ratio will be negative, where there wont be any, which is I think a nice place to be. Inventory fell 7% last year"
  • Want digital products and services to be over 70% of turnover by 2015: currently 56%
  • Experimenting with new models:
    • Brazil: Don't own real estate but supply educational resources for entire school: Pearson Inside Model
    • Margin profile is pretty strong
  • Current US book industry is zero sum game:
"If we can sell a book, which means that McGraw don't sell a book or Cengage don't sell a book or Houghton Mifflin don't sell a book, that's kind of victory. So it's a bit of a binary situation in that arena. When you get into the software arena, there's much more scope for our software to work with other people's software and to act in a sort of more collaborative way"

Corporate Development:
  • GBP 500 million to spend on right targets
  • Spent GBP 760 million in 2012 
  • No change in philosophy. It's very much about digital products, 
  • Opportunities anywhere in the world. Software in Hobart, Australia and in Oslo and the West Coast of America
Full transcript at SeekingAlpha

1 comment:

Thad McIlroy said...

What a refreshingly frank set of comments!
• Less and less will we be selling books... Selling better results. Anything involving books, frankly, from a working capital perspective is truly horrible....vs:
• Software at gross margin is a very nice business.
• Current US book industry is zero sum game.

These comments (skillfully edited!) tell more about the textbook publishing today than a dozen recent articles combined.